By Rahul V Kumar*

Puducherry has been in the news as a haven for tax evasion in India. Lower road taxes compared to other states in the country have made this union territory an ideal destination among car owners for registering their vehicles. Lowering tax rates, thereby increasing the number of taxpayers, is one of the many legal ways to increase the tax revenue. In fact, Puducherry has set a successful example by attracting taxpayers from beyond its borders.

However, the move has caused serious repercussions in other parts of the country. The issue came to the forefront, when a Kerala politician chose to ride a luxury car registered in Puducherry for a political rally. This was followed by the crime branch serving legal notices to two cinema actors from Kerala, demanding an explanation for registering their cars in Puducherry under fake addresses. Later, one of them was arrested and released on bail. The Kerala police also interrogated a prominent Malayalam actor (and present Rajya Sabha MP) regarding his car registration in Puducherry. Parallel investigations revealed that approximately 1000 cars driven in Kerala were registered in Puducherry in a similar manner. Following the actor’s arrest, the Motor Vehicles Department of Kerala announced a surge in revenue from taxes reclaimed from the owners of such vehicles. The case in point highlighted by the authorities in Kerala is that there is a huge loss of tax revenue to the state, when cars in Kerala are registered in Puducherry.

Some Concerns

Several questions arise in the context of the reported incidents of tax evasion. The crucial question is why an illegal market for car registration thrived in Puducherry. This market has major players, consisting of the entire apparatus of state departments, operating informally and formally, which connive to bring cars to the city and get them registered, providing false identity and address proofs. What could be the reason behind the rise of this illegal market? Is it because the tax rates are relatively low in Puducherry or because other regions in India have an unsustainably high level of road taxes? If it is the latter, it is high time that these regions started thinking on revising the tax rates. Nevertheless, even with lower road taxes, Puducherry has better roads than most of the other regions in the country.

The second question is as to who actually committed the crime. The notices issued against prominent actors and businesspersons led to the assumption that they have committed a grievous crime trying to evade taxes. These are the very people who pay hefty sums as taxes to the state. Their crime was that they tried to optimise their taxes by choosing to register their vehicles in a low tax region. To this end, they created address proofs claiming that they have been staying in Puducherry for the stipulated period. If that is indeed a crime, our parliamentarians who contest elections outside their home states and have no residential claims whatsoever to their contesting constituencies are setting a bad example. We then need to ask ourselves these questions. Do these parliamentarians have permanent residencies in these constituencies? Do they pay their share of taxes in these constituencies? How long do they stay in these constituencies to prove their commitment? Does arrest solve issues?

The Issue of Branding Cities

A successful city is able to generate a steady income by attracting people and providing quality services. In India, metropolitan areas have the upper hand, as the ‘metro’ tag signals prospective investors that the region could make huge investments worthwhile. It should follow logically that the more the number of competing cities in a federal system, the more prosperous the country or region would be. In India, a city is labelled a ‘metro’ based on the state’s definition of a metro. The branding of cities is at a nascent stage here. This is because there is little incentive for the city governments to do so, considering that such exercises carry the risk of no returns. Hence, cities try to attract revenue through alternate means that are likely to border on illegality. For instance, there are regions where alcohol is cheap, prostitution legal and tax rates relatively lower. This illustrates that when revenue is of paramount importance, moral values take a back seat.

A Taxing Solution

The state collects road taxes from vehicle owners for using public roads. Luxury cars draw higher tax rates because it is assumed that those who can afford expensive vehicles can pay more taxes. The service expected from the state in return is that the roads are maintained in good condition. However, this is not the case in most of the Indian states.

There is also the issue of pollution. Lower tax rates might create a large market for private vehicles that could increase pollution. Therefore, the oft-raised argument is that cities offering lower tax rates on vehicles are in a way encouraging pollution. Pollution is a major concern that needs serious attention. But do high tax rates help reduce pollution? The number of private vehicles on the roads is increasing everyday irrespective of the taxes. Pollution is the result of many factors, including fuel quality, poor traffic management and congestion, lack of incentive to use alternate public transport, increasing number of two-wheelers etc. Hence, managing or reducing pollution needs to take into account several such factors. Levying a high tax alone is not the solution.

Rahul V Kumar is Research Consultant at CPPR. Views expressed by the author is personal and does not represent that of CPPR

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